1. Trend strength analysis

The best way to comprehensively determine trend strength is to look at market momentum. Momentum determination is to confirm the existence of a price trend in either direction, up or down. Also, find out if the market has any momentum or is in a consolidation period. More clearly, momentum is a measure of the strength of a trend. While there are a number of technical indicators that we can use to measure volatility and momentum, such as Bollinger Bands based on standard deviations and the Average Directional Moving Indicator (ADX). on the price range. Here, however, we will discuss the measurement of trend strength, momentum, simply by looking at candlestick charts.

If you look closely at the candlestick charts, you will see that during a trend, the length or size of the Candles is usually larger during a sideways period. In the uptrend of EURUSD, like the example above, we can see that the size of the candles is still quite small as the price is moving sideways in an accumulation zone. However, as soon as it broke through the resistance and the uptrend resumed, the length of the Up Candle (Green) started to increase.

On the other hand, in this uptrend, the size of the Down Candle (Red) is shorter. The key to determining momentum is a ratio. Example: Assuming that the bullish candles in a sideways period have an average length of 50 pips (on the daily time frame) and after breaking these bullish candles narrow with a length of only 25 pips, you can be sure that the market lacks momentum. However, if you see bullish candles forming above 80+ or ​​100+ pips after the breakout, you can be fairly certain that strong bullish momentum is present in the market.

Just observing the price action and paying attention to the size of the Candles, we can easily identify in the example above that the buyers are dominating the market and the sellers are having difficulty pushing the price down.

Using the same rationale, you can also read Candlestick charts and identify divergences without any technical indicators. To determine a divergence, you must consider the ratio of the length of the candlestick, and the time it takes the market to make a new high, during an uptrend or a new low, during a downtrend.

It sounds complicated at first but sees the example above. In the first instance, you see some big bearish candles appear and break down below the uptrend line. Then you see two Up candles and a couple of Neutral Candles appear. What is important here to observe is the size of the next candles after the breakout. As you can see, the first bearish candlestick sequence recorded a 180 pips movement. However, the next series of five bullish and neutral candles recorded a move of only 88 pips, less than half. Since the price takes longer to make a bullish move and it cannot go any more than the previous bearish move, you can conclude that there is a bearish divergence in the market.

Similarly, in the second case, you can see three bearish candles unable to even fall below the low of the previous two bullish candles, which signals a bullish divergence.

Market phase analysis:

The market phase concept is quite simple. There are only three types of markets: Increase, Decrease and Consolidate in a Range. But, if we go deeper into these three phases, we can see more valuable things.

For example, in a move to accumulate before the onset of an uptrend, the price can fall or retreat for an extended period of time. Then, once it breaks out of the sideways range, the price can indicate a strong trend and upside momentum. At the end of an uptrend, you see new higher highs being created but it will take longer to reach this new high, which signals that the trend is entering an end, in other words. Another, the uplifting momentum is exhausted.

As you can see in the image above for the EUR / ZAR pair, the price broke out of the tight range then quickly pullback back to the breakout point, where resistance turned into support. As the uptrend continues, it shows maturity with big candles, then at the end of the trend, the price starts to show exhaustion. Finally, a downside break has initiated a bearish trend.

Understanding the market phase helps you determine if this market is suitable for your trading style and how to apply your trading system. If you use a break trading strategy but the market is sideways and lacks motivation then you will have difficulty finding entry points or possibly entering the market at the wrong time. Likewise, if you are a pullback trader but trade at the end of the trend exhaustion, you will be trapped and lose money.

Therefore, it is extremely important to know your trading style as well as which trading system is suitable for the market period.

Wave analysis:

Wave analysis began with the development of the Dow theory, which was later perfected by Ralph Nelson Elliott with the introduction of Elliott Wave Theory in the 1930s.

Elliott Wave Theory states that prices move across financial markets following fractal wave patterns. He argues that trends start with 5 push waves, as shown in the figure above, followed by three corrective waves, which take place from A to C, in contrast to the larger trend to complete one wave cycle.

New traders may have difficulty identifying exactly which waves are currently playing out in the market. Because a corrective move on the daily time frame can be a push wave on the H1 timeframe. So wave analysis can be ignored, and should only be used when you are familiar with Elliott waves.

The main mistake traders often make is that they try to trade with every signal and are always looking for opportunities to enter the market. Once you master the concept of big picture analysis, you will have completely different perspectives that bring about greater efficiency in trading.